Northrim Bank launched the Alaskanomics blog to provide news, analysis and commentary on Alaska’s economy. With contributions from economists, business leaders, policy makers and everyday Alaskans, Alaskanomics aims to engage readers in an ongoing conversation about our economy, now and in the future.

Northrim Bank launched the Alaskanomics blog to provide news, analysis and commentary on Alaska’s economy. With contributions from economists, business leaders, policy makers and everyday Alaskans, Alaskanomics aims to engage readers in an ongoing conversation about our economy, now and in the future.

Thursday, June 21, 2018

What All Business Owners Need To Know About Exit Planning

Alaska’s Baby Boomers stand on the threshold of what will be, for many, the largest opportunity in their careers.

But most of them don’t see it. Or just aren’t ready for it.

The few that do are positioned to win big.

According to the U.S. Small Business Administration:

99% of all Alaskan employers are small businesses.

75% of all Alaskan businesses are owned by someone 55 years old or older.

According to national research compiled by the Exit Planning Institute:

50% of business owners hope to exit within 5 years.

80% of these business owners have 90% of their net worth tied up in their business.

83% of these owners have no exit strategy.

When I talk to Boomer business owners, they have similar things on their minds:

They are ready to move on to “what’s next.” (But they usually don’t know what that is.)

They want to make sure their employees are well taken care of after their exit.

Their future hopes are based on the perceived value of their business.

Despite these hopes, many aren’t prepared. Too many don’t plan their exit until they feel emotionally “done” with their business.

Unfortunately, at that point, they discover that they don’t have much to sell because of one or two common mistakes:

Their business is still intrinsically dependent on their individual knowledge, skills, customer base or networks.

They’ve organized their business around their current lifestyle as opposed to building an investment vehicle (which supports a future lifestyle).

Resultingly, a high number of Alaskan business owners are surprised to experience an unnecessary loss of wealth.

Fortunately, with a little preparation, many of these owners are able to not only line up a lucrative sale, but they are also able to pass on their business legacy in a way that is financially sustainable, continues to provide value, and supports their employees and family.

The Three Threads of Your Exit Strategy

All business owners will exit at some point. No one lives or does business forever.

Here is what is needed for a smooth and lucrative exit on favorable terms:

Create a Clear Vision for Your Future: While many business owners are ready to move on, most don’t know what (or where) they want to move on to. Creating a clear vision or sense of “why” is imperative when it comes to exit planning.

The reality is that preparing for your future is important, but it’s not urgent. Yet, the attention of many business owners is often drawn to the urgent. Resultingly, they don’t prepare for exit opportunities. This also increases the likelihood of an undervalued exit under duress: Burnout, family challenges, health issues or financial challenges. On the other hand, having a strong “why” pulls you forward and helps you focus more on the important and less on the urgent.

Craft a Personal, Specific Financial Plan: Most business owners’ core desire is financial freedom. This entails the ability to pursue what they want without worrying about their quality of life.

Clarify what you want your life to look like and the numbers needed to create and sustain it. Work with a trusted financial advisor if needed. Create goals that your exit plan can help you accomplish.

Make a Plan to Maximize Your Company’s Value: In my experience, most business owners overestimate the value of their business. Sometimes dramatically.

At the same time, they underestimate the potential growth in their business. Most small businesses can quickly increase their value by a minimum of 20% (sometimes much more) just by a combination of improving management systems and tightening cost controls.

Other methods of improving value include:

Strengthening your market position.

Building reliable systems and management.

Increasing current revenues – as compared to primary competition.

Positioning for future business.

Improving your margins.

Just like with your home, if you sell your business as a “fixer-upper,” you are almost always leaving easy money on the table.

Time Framefor Exit Planning

Most of the same principles for a solid exit are the same as those for building a robust and scalable business, which means that you can begin at any time without fear of wasted effort.

However, if your exit is within your 5-year horizon, you should begin planning now.

If your exit is the beginning of your next chapter, approach it with a similar focus as your start-up years.

This time, you’ll be smarter and won’t need to work as hard – but you’ll want to invest the same sense intentionality and purpose into your planning.

A good exit takes care of you, your family, your employees and your customers. Don’t leave it to chance.